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Not Everyone's Scared About a Brexit Vote in the Commons

(Bloomberg) -- Some of the biggest money managers aren’t spooked by the prospect of a defeat of the U.K.’s Brexit divorce deal in Parliament.

Aberdeen Standard Investments, Allianz Global Investors and Investec Asset Management, which between them manage nearly $1.5 trillion, are keeping long positions on sterling, even though U.K. Prime Minister Theresa May looks set to lose a vote on her deal next week. They see lawmakers eventually acting to avoid the economic damage of crashing out of the European Union in March, as Parliament gained the power to shape the final Brexit settlement.

“The best route to agreement is by raising the probability of no deal,” said James Athey, a money manager at Aberdeen Standard, which oversees $736 billion and has bought the pound against the euro. “The second vote will be a lot closer to the deadline and thus likely sharpens the focus of many of those who voted against.”

With many of May’s own Conservative Party members unhappy with the agreement and the opposition Labour planning to vote against it, the odds of passing it with 320 votes on Dec. 11 look impossible. The scale of the challenge facing May was shown Tuesday as the government lost three votes, including one tabled by Tory lawmaker Dominic Grieve giving Parliament the ability to decide Britain’s Plan B if the divorce deal is rejected.

An initial rejection by Parliament would be a signal for Investec portfolio manager Russell Silberston to add to his pound position. Strategists see the pound falling to $1.25 if the deal is rejected, according to a Bloomberg survey.

“We are looking to buy on substantial weakness -- hence if the vote fails and we get a big fall, then we would look to pick some more up,” Silberston said. “We always felt the fears of a no deal were overstated and the Dominic Grieve amendment reinforces this view.”

The pound is trading at around $1.27 amid doubts about the Parliament vote, after surging above $1.31 in early November as a Brexit deal looked set to be agreed. That leaves it down around 15 percent from its level before the 2016 Brexit referendum.

An analysis by the Bank of England saw the pound crashing another 25 percent to below parity with the dollar in a “disorderly” Brexit scenario. While the chances of that outcome have decreased with Parliament taking back control, Aberdeen’s Athey said it was hard to have high conviction and there will be plenty of volatility, so he would only add to his position into a rally once the situation is resolved. And a big defeat for May’s deal could see him take his money off the table.

“If Theresa May loses the vote by 150 on Dec. 11, I would have to seriously reconsider,” he said. “The market would take a second referendum as a positive and I think that might be a mistake, so I would maybe use that as an opportunity to exit.”

The pound surged nearly 1 percent on Tuesday after the EU’s top court indicated the U.K. could unilaterally reverse the Brexit process, before the currency erased its gains. The constantly changing scenarios are keeping Allianz money manager Kacper Brzezniak busy adjusting his outcome probabilities, while he holds a call option on the pound.

“That’s ultimately a long-term view, based on my belief that a no-deal will be avoided,” said Brzezniak. “It’s very difficult at this stage to have a fixed game plan.”